Marijuana black market thrives despite first year of legal sales

Sgt. Lani Pascual/USNORTHCOM

A California National Guard Counterdrug Task Force team member cuts down illegal marijuana plants at an illicit grow site in the Sierra National Forest near Fresno on August 21. The eradication efforts were part of Operation Forest Watch, a month-long, multi-agency effort.

A California National Guard Counterdrug Task Force team member cuts down illegal marijuana plants at an illicit grow site in the Sierra National Forest near Fresno on August 21. The eradication efforts were part of Operation Forest Watch, a month-long, multi-agency effort. (Sgt. Lani Pascual/USNORTHCOM)

When California voters passed Proposition 64 allowing recreational marijuana, they likely imagined a place like March and Ash.

Stepping into the licensed Mission Valley dispensary is reminiscent of a high-end beauty counter. Stylish yet approachable, the shop is staffed with friendly “budtenders” on hand to answer questions about vetted, tested product lines.

The sales, in turn, bolster city and state coffers through taxes.

Yet, a year after legalized sales, that’s not how much of the marijuana in California is being sold.

A black market for marijuana continues to thrive, with illicit storefronts and delivery services cashing in while defying orders to close and Mexican drug cartels not ready to completely abandon their foothold.

And it’s not just Californians who are the customers. Some of the state’s growers have continued to tap into a national demand for the potent, craft cannabis the region has become known for, exporting it illegally — often through the mail — to the East Coast for top dollar.

Part of the problem, industry analysts say, is only about 25 percent of cities and counties in California have allowed marijuana businesses to operate in their jurisdictions.

“Until there is greater access to the regulated market — more dispensaries, more cultivators, manufacturers, distributors — as well as lower taxes, we are going to continue to see the black market,” said Michael Cindrich, a San Diego attorney representing marijuana businesses. “And in many cases, it’s still currently winning.”

Another glaring issue, licensed owners say, is the lack of incentive for many already operating in the state’s long established industry to go legal.

“There are virtually no consequences for running an unlicensed operation,” said Lincoln Fish, chief executive of Outco, a wholesale cultivator and manufacturer that also runs two medical dispensaries.

Many agree, however, that it is unrealistic to expect legalization would stifle the black market right away.

Gov. Gavin Newsom, who lobbied for Proposition 64 as lieutenant governor, told The San Diego Union-Tribune Editorial Board last year that he expected it would take “five to seven years to substantively address the black market, to see a maturation on tax revenue, as we transition from something old to something new.”

Mexican marijuana isn’t dead

Marijuana used to be the cash crop of Mexican drug cartels. But the slow spread of legalization across the U.S. has taken a serious bite out of business.

In the past seven years, Border Patrol has seen an 82 percent drop in marijuana seizures — from 2.4 million pounds in fiscal 2013 to 439,500 pounds last year, most of it believed to be Mexican. Only 7,700 pounds of that were confiscated along the border and at nearby vehicle checkpoints in the San Diego sector, while most moves through Texas and Arizona.

The bulky and smelly nature of marijuana make the drug better suited to smuggle through more remote areas of the border or tunnels rather than ports of entry, as harder drugs most frequently are. Last year, more than 283,000 pounds of marijuana were seized at ports of entry.

While there is no way to accurately measure how much of the drug is smuggled across the border, the seizure data strongly indicates the Mexican marijuana is slowly becoming a disappearing trade.

“It hasn’t been that important for a decade or more for the overall income stream,” said Alejandro Hope, a former top security official in Mexico and a partner at GEA, a Mexico City-based consulting firm.

But any hope that legalization might limit the influence of powerful drug trafficking organizations would be wishful thinking.

Ulises Ruiz/Getty Images

A member of the Mexican Attorney General's Office stands guard during the incineration of more than 3 tons of marijuana and other narcotics, in Zapopan, Jalisco State, Mexico, on Feb. 1, 2019.

A member of the Mexican Attorney General's Office stands guard during the incineration of more than 3 tons of marijuana and other narcotics, in Zapopan, Jalisco State, Mexico, on Feb. 1, 2019. (Ulises Ruiz/Getty Images)

Ever nimble, the cartels have shifted to harder drugs — methamphetamine, cocaine, heroin and fentanyl — some of which are extremely cheap to manufacture and hold high value in small amounts. Criminal organizations have also turned to kidnappings, fuel theft, extortion and human trafficking to make up for loss in revenue.

“The notion that this is going to cripple the finances of Mexican criminal syndicates is ludicrous,” Hope said of legalization.

Still, Mexican traffickers have not entirely released their grip on the American marijuana market.

For example, when authorities pulled over a semi-truck in Calexico in May, they found brown bundles stacked floor to ceiling inside. The haul — a whopping 23,000 pounds of marijuana — turned out to be the Imperial County Sheriff’s Office’s biggest drug bust of 2018.

Courtesy of Imperial County Sheriff's Office

The Imperial County Sheriff's Office seized 23,000 pounds of marijuana in a semi-truck in Calexico in May.

The Imperial County Sheriff's Office seized 23,000 pounds of marijuana in a semi-truck in Calexico in May. (Courtesy of Imperial County Sheriff's Office)

A month later, officers seized 15,000 pounds of marijuana hidden in cargo at San Diego’s Otay Mesa Port of Entry.

“We are continuing to see more marijuana production in Mexico than we might expect with legalization,” said David Shirk, a professor at the University of San Diego and head of the school's Justice in Mexico project.

In fact, some farmers in the fertile mountains of Mexico’s Guerrero state are actually abandoning their poppy crops — which, when processed into heroin, helped feed the U.S. opioid crisis — and are turning again to marijuana, which is easier to cultivate, according to a June report by the Associated Press. The farmers say they are adjusting to the explosive rise in fentanyl — synthetic heroin that is much easier and cheaper to produce — and the resulting drop in opium prices.

“There’s still clearly some market for it,” Shirk said.

Experts say most of what comes through California is bound for states that haven’t legalized it yet, or to regions with a less favorable growing climate. Ten states and the District of Columbia have legalized recreational use, while 33 allow medicinal use.

However, some of the Mexican product stays in California.

“It’s still very common,” a Sheriff’s Department spokesperson said.

For those under 21 — the age limit set for legal adult recreational use — it may be easier to procure marijuana from traditional street dealers.

“Most of the stuff coming Mexico is not quality product. It sells for very, very cheap,” said Fish. “They are trying to serve the very low end of the market with that.”

A lot of cartel-grown marijuana is actually being cultivated in the United States, on remote pockets of public forest land where they divert water supply, use toxic chemicals and poach wildlife, authorities said.

Of the 1.5 million plants seized from public lands nationwide in 2017, 1.4 million of them were in California, according to the U.S. Forest Service. Much of that is in the so-called “Emerald Triangle” region — Humboldt, Mendocino and Trinity counties — in northern California.

In San Diego County, the Cleveland National Forest, south of the Riverside County line, is a popular growing area, as is Fallbrook and beyond.

For the agents of the DEA’s Narcotics Task Force Team 9, many of the campsites occupied by crop tenders and guards offer clues that point back to Mexico. A common indicator are the bottles of Mexican pesticides that are banned in the U.S. Some of those pesticides have also been found in marijuana being sold in illicit dispensaries, a sheriff’s official said.

Last year, the county task force seized 75,000 plants and 91,000 pounds of processed marijuana, as well as eradicated 33 grow sites — mostly on public land.

While law enforcement can wipe out a grow site, prosecuting the people behind it is another matter.

“These grow locations, our guys have to hike in or be flown in and dropped,” explained DEA Assistant Special Agent in Charge Steven Woodland, who oversees the task force. “It’s hard to do a true criminal investigation when you can’t do surveillance on these people.”

Dangerous concentrates

When it comes to public safety, law enforcement points to illicit THC extraction labs as the biggest threat the black market brings to the region.

Extraction labs take the leafy parts of marijuana and separate out the THC, or tetrahydrocannabinol — the main active ingredient in marijuana that causes the high. The concentrate becomes a wax or oil that can be smoked, known as “dabbing,” or turned into high-demand products including edibles, tinctures, creams and vape pens.

“It’s for the high, it’s the potency,” Woodland said. “The average concentrate is 82 percent THC — four times more potent than the average traditional leafy marijuana.”

It is also gold. On the black market, hash oil goes for $40 to $100 a gram, according to DEA estimates.

A common extraction method uses butane. It is a volatile process prone to explosions — similar to meth labs of the past — and endangers not only the participants but also their neighbors.

One mega bust last year involved a complex of industrial buildings in Kearny Mesa with an indoor grow operation and four extraction labs, two using carbon dioxide and two using butane. Team 9 agents seized tens of thousands of vape cartridges there, along with 150 gallons of concentrate, 3,000 plants and 7,000 pounds of processed marijuana. The operation was tied to two dispensaries and a delivery service, Woodland said.

In March, an explosion rocked a Vista home, where authorities found hundreds of butane cans and signs of an extraction lab.

Mexican marijuana is not as potent as domestically grown cannabis, “so you may have to use four or five times the amount of marijuana to do extractions to get the THC concentrations you want,” Woodland said. But it could pencil out financially.

As of July, illicit wholesale domestic marijuana was going for $2,700 to $4,500 per pound, compared to the Mexican variety at $300 to $500 a pound, Woodland said.

Industry professionals said while it may be possible that some labs are using Mexican pot, the supply would not be steady, and the end product would still be inferior.

Concrete evidence has been hard to come by in San Diego. When the DEA task force seizes illegal labs, the plants are not usually tested to determine their origin. And with the decriminalization of marijuana, suspects have much less incentive to cooperate with investigators by spilling secrets.

Law enforcement is waiting to see if the Mexican cartels will become interested in producing their own concentrate to smuggle north, as they have done with meth in their “superlabs” and now fentanyl.

“They have the equipment and know how to do it down there. I think it’s just a matter of time,” Woodland said.

Open for business

Where the cartels operate in secret, thousands of businesses operate in the open, under the guise of legitimacy.

Illicit storefronts across the county advertise in free weeklies and online, including the go-to guide Weedmaps.com. They operate websites, listing products and prices, and often sell what appear to be big brand names at lower prices. What they sidestep are testing requirements, taxes and high start-up costs — keeping the price point low.

To the casual consumer, it can be difficult to discern what’s legal and what’s not.

Investigators suspect many of these owners were selling illicitly before legalization and are now capitalizing on the increased interest that has been put on recreational use of the drug.

“They see easy money,” said San Diego police Lt. Matt Novak, chief of narcotics. “Even if they stay in business two, three months and make $200,000, $300,000 or $400,000 and get out, it’s very lucrative.”

Unlike the licensed stores, the supply chain is opaque and likely comes from illicit growers, distributors and manufacturers, especially from the Humboldt area, Novak said.

Some industry insiders say there is growing suspicion that some licensed brand names are selling to illegal shops, possibly under pseudo labels. Other products purporting to be legitimate brands are suspected of being counterfeits from China.

“California has spent a lot of time and effort creating a framework making sure we are treating this like a controlled substance,” said Fish, who is headquartered in unincorporated El Cajon, near Gillespie Field.

He said that’s good, even if some of the regulations seem onerous, as long as the state holds up its end of the bargain and goes after the bad actors. “Bottom line, they aren’t going after you. I can walk to five dispensaries from here that are illegal.”

Going after the illegal dispensaries have become a frustrating game of whack-a-mole for the various jurisdictions across the county — and state.

Pop one unlicensed store and it either reopens in the same spot later, or it moves to another location under a new name. Owners hide their tracks, making it difficult to take civil or even criminal action against the shot-callers. High fines levied against illicit dispensaries are accepted as a cost of doing business because the earnings are just that good. For instance, in Chula Vista, illicit businesses can be fined $10,000 a day.

There also isn’t much bite when criminal charges are filed; possession of marijuana for sale is now a misdemeanor.

Now, county officials are giving landlords that incentive. In a strategy started last spring landlords are given notice and allowed 10 days to kick out their marijuana-selling tenants, or face losing access to their buildings. The tactic has had some success in the Spring Valley area.

The latest effort is in Valley Center, where on Wednesday sheriff’s officials raided two dispensaries, seizing merchandise before boarding up at least one of the businesses.

“Any person found inside the property after the County secures the building is subject to arrest,” the Sheriff’s Department warned.

Fish said going after the landlords makes the most sense to deal with the issue effectively and questions why more cities haven’t tried.

“Start fining the landlords $50,000 a day and this problem would be over,” he said.

The city of San Diego has found the combination of enforcement and prosecution a successful formula, one that has pretty much taken care of the storefront problem, Novak said. But it is labor intensive and takes manpower.

In 2018, the City Attorney’s Office prosecuted 69 cases of possession of marijuana with intent to sell, all tied to either storefronts or delivery services, the office said.

Now, the problem is illicit delivery services that offer to bring a range of marijuana products to your doorstep. About 90 are suspected of operating in the city and prove a different kind of challenge.

Only licensed dispensaries are allowed to operate as delivery services based out of the city. But adding to the complexity is a new rule that allows services licensed in one jurisdiction to deliver anywhere in the state, even in jurisdictions that have banned sales.

Marijuana “farmers markets” offer another illicit shopping experience. Two that had been operating in Ocean Beach and North Park were busted last month by San Diego police.

Even with the bustling California market for marijuana, the state is only consuming a fraction of what’s being grown here. The state Department of Food and Agriculture estimated in 2017 that the state was producing between 13 and 15.5 million pounds of marijuana per year and consuming just 2.5 million pounds. That kind of supply has created a booming illegal export business across the country.

Much of it is sent through the U.S. Postal Service or private parcel such as FedEx using false sender information.

“I was speaking at an agriculture conference,” recalled Fish of Outco, “and I met a guy who was talking about making a few thousand vape cartridges a week and shipping them to New York. He was talking openly about it in a roomful of licensed people.”

The long game

In the end, none of these challenges really come as a surprise to many in the profession.

Some cities and counties passed laws quickly in the wake of Proposition 64 prohibiting legal business not because they are necessarily against it, but because they wanted to take the time to regulate the industry their own way, said Fish.

So far, San Diego is the only city locally with legal adult-use dispensaries, with 14 currently open and another 19 in the works. However, many other jurisdictions statewide are beginning to open up the application process, including Chula Vista, which has been plagued by illegal storefronts. Many other cities in the county are exploring or already allow medical sales but haven’t expanded to recreational.

Once there is greater legal access, Cindrich said, “the ultimate impact will be on the black market.”

Business owners say the state and local governments also need to step up a promise to crack down on the illicit operators.

The state warned Weedmaps to stop listing illegal services, but the website countered that it is not selling marijuana and therefore is not subject to the Bureau of Cannabis Control’s regulations.

Then there will always be those who prefer to buy on the black market. The state’s longstanding medical marijuana tradition has created informal collectives that would rather do things the way they always have. For others, especially professionals or public figures, the public nature of buying cannabis can be too nerve-wracking.

Some are just loyal to their dealers.

“It goes back to ‘If it’s not broke, don’t fix it,’” said a 30-year-old North Park resident who did not want be named.

Though he is an infrequent buyer, he said he has always had hassle-free transactions with people in his social circle.

“You build a connection with someone and this person is easy to work with, professional, drama free.”

He said he visited a Joshua Tree dispensary once out of necessity and was unimpressed.

“I spent $85 when I didn’t want to spend more than $30,” he said.

At March and Ash — the Mission Valley dispensary that opened in September with an appearance by actor Tommy Chong of “Cheech and Chong” fame — co-founder and CEO Blake Marchand said he understands the industry frustration over the black market, but ultimately doesn’t see it as affecting what he and his partner are trying to accomplish.

“We offer safe access and education,” Marchand said during a recent interview in the store’s back office, as staff helped a steady flow of customers on the sales floor.